Smarter Loans > Financing Options for Business Equipment

Financing Options for Business Equipment

Every business in existence must acquire essential equipment to maintain profitable operations, whether it is a first-time equipment purchase or replacing an outdated item. The purchase of business equipment is considered ownership of a hard, physical business asset. Depending on industry, that asset can be anything from a small laptop computer to a tractor worth over $100,000. With the exception of the relatively few lucky business owners that pay cash for equipment to run their companies, these necessities are financed.

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The three main financing options for business equipment are loans, leases, and lines of credit. Each option offers a variety of credit programs which cater to specific business types and sizes. Which option should a business owner choose to finance equipment? There are a number of factors to consider in the decision to finance rather than lease business equipment.

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Business Equipment Loans

Not all business owners who apply for equipment loans do so because they don’t have money. Among other reasons, some choose to finance rather than drain working capital. They use the cash to pay expenses like payroll, utilities, and marketing. This business strategy can work for any company, but especially for businesses that need to buy very expensive equipment.

In the United States alone, 78% of businesses finance their equipment, according to the Equipment Leasing and Financing Association (ELFA), a trade association representing over 550 members in the business finance sector.

ELFA, among other associations, are of the opinion that equipment financing not only contributes to business success, but to economic growth and job creation in the country. Undoubtedly, the ability for businesses to buy the proper equipment and remain viable results in similar benefits to countries around the globe.

In addition to banks and other institutions, there are specific lenders that fund business equipment purchases. They are known as equipment finance companies. There are similarities in the process regardless to how the business owner gets financing, such as:

  • Loans to buy business equipment are a form of secured credit. This means that the equipment is security for the loan. If the borrower defaults, the equipment is repossessed.
  • Borrower must have verifiable ability to repay the loan.
  • A down payment is needed if required by the lender.
  • Most lenders finance only a portion of the price of equipment, usually 80 to 90 percent depending on the borrower.
  • Business documentation is required, such as cash flow statements.

Owning a piece of equipment that has been financed is like any other secured property. The lender places a lien on the equipment which means they have a right to take possession for non-payment as long as there is a balance on the loan. The business owner agrees to keep the equipment in good shape and insured. When the equipment loan is paid, full ownership is transferred to the owner.

Business Equipment Leasing

Leasing, or equipment rental, is a popular choice for businesses in need of items to run their companies. Rather than getting a loan, they pay a fee to borrow equipment purchased by the lender for a specified time period. Because the equipment is leased, the business does not receive ownership, except in capital leases which are outlined below. The majority of business owners that lease rather than buy equipment have reasons for doing so in common, which include:

  • The business trades out equipment frequently (such as upgrading computer systems).
  • There is not enough capital available for a down payment on a loan.
  • The business operates seasonally.
  • Owner is unable to qualify for a loan.
  • The company moves around to different locations (like carnivals or selling items at various antiques shows)

Some lenders allow businesses to buy the equipment at the end of the lease term. 

One variation of this type of lease is called the $1 buyout lease, in which the buyer makes a nominal payment at the end of the leasing term and is given ownership of the equipment.

Other leasing companies offer the option of “leasing to own”, meaning that a portion of the monthly lease payment goes toward buying the equipment.

Capital and Operating Leases

There are two kinds of equipment leases, which are capital and operating leases. Each have a different effect on managing a business, as outlined below.

Capital leases:

  • are long term leases for equipment that does not become obsolete, such as machinery
  • represents ownership, making the equipment an asset
  • gives the business the same advantages and disadvantages of ownership
  • are viewed as business debts

Operating leases:

  • are short term leases of less than one year
  • meet the needs of businesses that use high-tech and technology equipment
  • are considered an operating expense
  • offer no ownership advantages or disadvantages to the business

Lines of Credit

Lines of credit offer financial flexibility to business owners. Many businesses maintain a line of credit to buy inventory as they need it while managing their cash flow. Access to a line of credit also comes in handy when expenses, like equipment failure or building repairs, pop up unexpectedly.

A business credit card works somewhat like a line of credit, but usually the card has a lower limit and higher interest rate. Payments on a line of credit are based upon the balance owed plus interest. Unlike a business loan, a line of credit is unsecured revolving credit and can be reused as the principal is paid down.

Review top business loan providers in Canada and learn more about whether a business loan or line of credit is best for you!

Pros and Cons: Buy vs. Lease

All three options have advantages and disadvantages that influence which financing choice the business owner makes. 

Business Equipment Loan Pros:

Business Equipment Loan Cons:

  • Fixed monthly payments
  • Lower interest than other financing
  • Ability to keep cash on hand for expenses
  • Possible tax deductions and benefits
  • The business owns the equipment once paid in full
  • Usually requires good to excellent credit to qualify
  • Payments are higher than leases
  • Business is responsible for equipment maintenance
  • Equipment may be outdated or obsolete by the time it is paid

Equipment Leasing Pros:

Equipment Leasing Cons:

  • Leases don’t usually require a down payment
  • Repairs are made by the lessor (operating leases only)
  • Monthly payments are lower than a loan
  • It is easier to upgrade equipment when leased
  • Represents ownership as an asset (capital leases only)
  • Business doesn’t actually own the equipment
  • Cost of equipment is more expensive if purchased at the end of lease term
  • Online equipment lessors are harder to find

Lines of credit are a convenient and flexible way to keep working capital during off season. One disadvantage of depending on this option for funding is that the credit line is usually not sufficient to cover major purchases or high expenses. Financing business credit in addition to keeping a line of credit open for other expenses has proven to be an effective financial strategy for many businesses.

There are several other types of alternative financing options for business equipment that are available. Businesses can choose from lenders and lessors who specifically cater to small businesses, large corporations, as well as specialized or unusual equipment. Sources can be found in brick and mortar establishments and online.

Business owners should research the equipment ahead of time to determine the type, size (and even brand) of equipment they need. They should research lenders, leasing, and alternative financing to know for certain which one will work for their business. Gathering all required paperwork makes any type of financing process go by smoothly and quickly. Advance preparation equals steady business growth without interruption.

About The Author:

Sheila Kay is an author, ghostwriter and editor residing in the Atlanta, GA area. Among her favorite writing genres are creative nonfiction, self-improvement, and finances. Her first published book, PTSD and the Undefeated Me, is a memoir which has been a stepping stone to her involvement with mental health advocacy for military and civilian men and women. She is currently working on the first fiction novel to be published under her name. For more information or to purchase her books, visit Sheila’s Author Page on Amazon.com.